We are often accused here on FT Alphaville of being too bearish, pessimistic, negative, gloomy etc. So here’s something positive, courtesy of David Bianco, a strategist at UBS.
He thinks the S&P 500 will end 2009 at 1,300 points. That’s right 1,300 points or 55 per cent from its current level.
And the reason? Mr Bianco can explain.
The Panic of 2008 created a confidence vacuum that policy is rushing to fill
Filling the void is a challenge, but we take comfort in that now every policy maker in the world is trying to jump-start confidence in the system. Once this happens, powerful positive underlying economic forces such as the worldwide proliferation of technology and globalization should make confidence shine again.
An opportunity to buy the big-cap global growth stocks of the S&P 500.
We see recent sharp market declines — from capital being pulled from leveraged investment strategies — as an opportunity to buy the leading big-cap growth stocks of the S&P 500 at deep discounts to intrinsic value. Their world class assets, backed by strong balance sheets, are enviably positioned to benefit from global growth. These stocks will be sought after when capital returns from the sidelines.
Mr Bianco suggests looking for the following potential cataysts for a “sizeable and lasting upturn”.
1) Slow healing of financial system and lower risk premiums
There are many financial system vital signs to monitor, but clarity only comes retrospectively and advanced opportunities are limited as stocks tend to react coincidently. Measures to watch include: 1) bank loan and deposit base growth, 2) loan loss provisions vs. charge-offs – continued reserve build, 3) tighter TED and credit spreads, 4) lower mortgage rates, and 5) Fed loan officer survey.
2) Systemic effort to rework troubled mortgages
Injecting capital into the major banks will help them absorb expected credit losses and support loan growth and it was an important step in stemming the panic. However, efforts are still needed to minimize the expected credit losses and put home owners into sustainable mortgages to stabilize their finances and the housing market itself. Possibilities include government purchases of troubled mortgages with broad stroke restructuring/refinancing and/or further subsidization of mortgages to drive a boom in household initiated refinancing.
3) President Obama discovers the virtues of supply side economics
Clear opposition from the incoming administration to any tax increase until the economy finds firm footing and a tax cut for low to middle income households would go a long way, in our opinion. We think permanent income and also business tax cuts (even if modest) would greatly improve investor confidence. We support increased infrastructure related direct spending, but we see tax cuts as key to effective stimulus because the private sector best allocates resources.
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